The "Walmart effect" is often used in economics to refer to the phenomenon that "when consumers reduce consumption, they will choose the lowest-priced goods in each category." As the world's largest retailer, Wal-Mart has become a benchmark in the consumer market to a certain extent.
Recently, Walmart released its third quarter financial report for fiscal year 2024, which showed that it achieved revenue and profit growth compared with the same period last year, reflecting the continued increase in consumer demand for daily necessities. However, after the financial report was released, Wal-Mart's warning about changes in American consumer behavior triggered a collective weakening of the entire retail sector. On the day the financial report was released, Walmart’s stock price fell by more than 8%.
Against the background of slowing consumer spending, Walmart can increase revenue and profits, demonstrating its strong development foundation. But next, facing a more complex market environment, can Wal-Mart achieve good results again?
Driven by market demand, Walmart has strong growth momentum
The financial report shows that in the third quarter of fiscal year 2024, Walmart's total revenue was US$160.8 billion, a year-on-year increase of 5.2%; operating profit was US$6.2 billion, a year-on-year increase of 130.1%; adjusted earnings per share was US$1.53.
Source: Walmart financial report
Such performance is affected to a certain extent by the macro environment and consumer behavior. Data released by the U.S. Department of Labor showed that the U.S. Consumer Price Index (CPI) rose by 3.7% year-on-year in September and by 0.4% month-on-month. In terms of breakdown data, food prices increased by 0.2% month-on-month and 3.7% year-on-year.
In the context of inflation, commodity prices have risen, and consumers have increasingly prioritized purchasing daily necessities, which is beneficial to the development of Wal-Mart's retail business to a certain extent.
According to the financial report, in the third quarter, Walmart’s U.S. revenue was $109.4 billion, a year-on-year increase of 4.4%; international revenue was $26.7 billion, a year-on-year increase of 5.4%; Sam’s Club’s U.S. revenue was $18.9 billion, a year-on-year increase of 3.2%. These are inseparable from the sales of daily necessities such as food and consumables.
In contrast, home improvement retail company Home Depot's third-quarter same-store sales fell 3.1% year-on-year as consumers continued to reduce purchases of non-essential items.
Earlier this year, Walmart Chief Financial Officer John David Rainey said that sales of non-essential items have been weak for more than a year as Americans have increased their spending on necessities such as food. In this realistic context, seizing the daily necessities market may not only mean an increase in direct sales, but also create opportunities for users to enter the store to purchase non-necessities.
Against this background, Wal-Mart's retail business can always maintain strong performance, which is also inseparable from its keen insight into consumer needs.
For example, as online shopping has become a trend, customers are increasingly demanding ways to obtain goods. According to the 2023 U.S. Consumer Online Shopping Survey Report released by Power of Reviews, factors such as buyer reviews, product prices, free shipping and free returns, UGC images and videos, search engine results, and social media will all affect consumers’ online shopping time decision. As consumers become more and more demanding, Walmart is putting a lot of thought into how to create a more convenient and efficient shopping experience for customers.
This year, John David Rennie once mentioned, "We are using stores to complete more than 50% of online orders and launching a local distribution network to deliver products to customers faster and at a lower cost."
At the same time, as third-party sellers play a significant role in expanding product categories and attracting traffic to the platform, attracting more third-party sellers has become one of Wal-Mart's important e-commerce strategies in the past year.
These actions of Walmart have also translated into performance. The financial report shows that Walmart’s U.S. e-commerce sales increased by 24% year-on-year, driven by strong pickup and delivery business.
On the other hand, Wal-Mart's price is also its important advantage. Even when inflation rises, Wal-Mart always sticks to price levels and uses some promotional activities to stimulate consumers' desire to buy.
Although related measures and inflation have led to an increase in corporate operating costs, the financial report shows that Wal-Mart's operating costs increased by 4.8% in the third quarter compared with the same period last year. However, thanks to the revenue growth rate being greater than the cost growth rate, this quarter, Wal-Mart's profitability has significantly improved. Well, the gross profit margin was 24%, compared with 23.7% in the same period last year, an increase of 32 percentage points.
Overall, Walmart is currently operating smoothly. However, judging from the future economic situation, Wal-Mart's performance growth may be full of uncertainty.
As it continues to improve its supply chain, can Walmart continue to improve?
In the U.S. market, consumers spending money prudently may become the norm, and the situation in the retail industry is not optimistic. "We are now more cautious with consumers than we were last quarter," John David Rainey said in an interview. He said that Wal-Mart's sales experienced a "more sharp decline" in the last two weeks of October. While sales and holiday shopping got November off to a good start, rising interest rates and resumption of student loan payments are weighing on demand.
Recently, the National Retail Federation (NRF) also estimated that during this year’s prime retail sales period, the U.S. sales growth rate may be the slowest in five years. According to NRF's latest estimates, during the prime period from November to December, sales are expected to be between US$957.3-966.6 billion, equivalent to a 3% to 4% growth, lower than last year's 5.4% and 2021's 12.7% growth.
At the same time, Walmart President and CEO Doug McMillon mentioned on the conference call, “In the United States, we may go through a period of deflation in the next few months, which will bring greater pressure on performance. ".
All the above situations mean that the retail market will have limited room for growth in the coming period. In order to occupy their own place, competition among retail companies is bound to become more brutal. And whoever can gain advantages in price, products and convenience may have a greater chance of breaking through.
In terms of price, Wal-Mart has obvious advantages. Wal-Mart founder Sam Walton once said in the book "Rich America", "Sam put the words 'Everyday Affordable Prices' on one side of the sign and 'Your Satisfaction Guaranteed' on the other side. These two principles serve as the foundation of Wal-Mart's business philosophy and still dominate the development of Wal-Mart."
This business idea can be said to be closely in line with changes in consumer demand. A study by McKinsey found that nearly 80% of consumers tend to "downgrade" their planned purchases during this year's Black Friday shopping, replacing them with cheaper alternatives or giving up entirely. Compared with July 2022, when the U.S. inflation rate hit a 40-year high, consumers' willingness to "downgrade consumption" has increased by 5% this year.
Under this circumstance, if Wal-Mart continues to enhance price attractiveness, it may be able to significantly increase product sales.
In terms of product richness, it is reported that Walmart’s e-commerce platform has more than 400 million SKUs. At the third quarter financial report, Doug McMillon mentioned that since the beginning of last year, Walmart’s cross-border e-commerce has more than doubled the number of goods it provides consumers in the United States, and this business is growing rapidly.
Walmart has also put a lot of effort into convenience. Walmart not only provides timed delivery services, but also launches late-night delivery services to extend delivery hours during the holiday season in the second half of this year. It is understood that through next-day delivery, two-day delivery and other delivery services, Walmart's delivery coverage has covered nearly 90% of the U.S. population.
One of the pillars that supports Wal-Mart's continued efforts in price, products, convenience, etc. is its "ultimate supply chain."
On the one hand, Wal-Mart maintains long-term and stable strategic cooperative relationships with suppliers, and shares product information with suppliers in real time so that suppliers can replenish goods in a timely manner based on front-end sales. On the other hand, Wal-Mart attaches great importance to the construction of distribution capabilities, and when building new stores, it is necessary to have a distribution center as a guarantee for independent distribution.
Sufficient distribution capacity can ensure the speed and accuracy of delivery. This year, Walmart revealed that it can provide same-day delivery services to more than 4,000 Walmart stores and nearly 600 Sam’s Club stores. In China, all Walmart stores provide delivery services, and nearly 80% of online orders are delivered within one hour.
Today, Walmart is still improving its supply chain and has determined the core to be to increase inventory density in the "first mile", make the "middle mile" as efficient as possible, and shorten the delivery time of the "last mile". To achieve these goals, Walmart is focusing on technological improvements. Previously, Doug McMillon revealed that Walmart is building a system with more links, more intelligence and automation. For example, in May this year, Walmart opened a new distribution center (MFC) in Bentonville, Arkansas, USA, and equipped it with a high-tech storage and retrieval system called "Alphabot".
It can also be seen from Wal-Mart's financial report data that its layout of the supply chain has brought positive feedback. Based on the good operation of its supply chain, Walmart's inventory will decrease overall in 2023 compared with 2022. As of October 31, 2023, its inventory was US$63.951 billion, compared with US$64.706 billion in the same period last year.
Source: Walmart financial report
For fiscal year 2024, Walmart’s latest expectations are also higher than before. It expects full-year net sales growth to remain at 5-5.5%. Although the uncertainty of the market situation has put pressure on Wal-Mart, Wal-Mart's pursuit of operational efficiency and its perfect supply chain still give it considerable growth momentum.
Author: Jiuru
Source: US Stock Research Institute